Britain’s trickiest economic challenge is back in spotlight

Bloomberg

Eclipsed by Brexit headlines, the most puzzling economic problem facing Britain is back in the limelight.
Abysmal productivity growth has plagued the UK for a decade, sapping its underlying strength and undermining wage growth. Countless explanations and solutions have been proffered, and now the debate is raging again after a proposal that fixing it be made one of the Bank of England’s core tasks.
The seriousness of the issue was laid out in stark terms by BOE Chief Economist Andy Haldane last week. “The UK faces perhaps no greater challenge, economically and socially, than its productivity challenge,” he said in a speech analysing causes and solutions. To put it in an international context, it takes a British worker five days to produce what a French worker produces in less than four. Growth in output per hour has yet to recover its pre-crisis trend and many economists fear that leaving the European Union could see Britain fall further behind by depriving the economy of productivity-enhancing foreign innovation and investment.
Any government would welcome a boost to productivity, not least because the problem is projected to cost the Treasury tens of billions of pounds in lost revenue over the coming years. There are implications for monetary policy too. The UK economy is growing around 1.5 percent a year, behind the euro area and the US, but weak productivity growth means there is little, if any, room to expand more quickly without fueling unwanted inflation.
BOE Governor Mark Carney has a chance to address the issue this week when he delivers a speech in Newcastle in Northern England.
Recent governments have given several nods to fixes, but some lawmakers are looking elsewhere. In a report by economist Graham Turner, the opposition Labour Party suggested that the BOE add a 3 percent productivity growth target to its remit as part of an overhaul of the monetary policy framework.
The proposal has been criticised by economists including Haldane, who argues that the supply side of the economy is not for central banks to determine.
“Central bank tools are cyclical, rather than structural,” he said in a speech on productivity. “We do not build schools, colleges, houses, roads, railways or banks. Nor do we finance them.”
A related issue is whether it’s right to hand more power to a technocratic institution already in focus for the scope of its reach and criticised for the side effects of its actions since the financial crisis. “It’s good to be ambitious but there’s a bigger question about whether you want to give the BOE ever more powers without any more accountability,” said Torsten Bell, director of the Resolution Foundation, a London-based think tank.
The problem is, of course, not unique to Britain. Productivity has grown slowly everywhere since the financial crisis, holding back wage growth.
Britain nonetheless stands out. In the decade before the 2008 recession, productivity grew by about 2 percent a year. Since the recovery began, it’s averaged less than 0.2 percent, with only a minimal improvement expected in the coming years. According to a BOE analysis, worker efficiency on a 10-year rolling basis is at its lowest since the industrial revolution.
One first step may be to figure out exactly what’s happened. Diagnoses range from the drag of “zombie firms” kept alive by loose monetary policy to UK’s reliance on services, which lag manufacturing in terms of efficiency growth. According to Haldane, worst-performing quarter of British companies have levels of productivity around 80 percent or more below the median, meaning a “long and lengthening tail of stationary companies.”
Proposed remedies include sharing tech to track supply chai-ns to making better use of universities, firms and government age- ncies to help transfer know-how between firms, sectors, regions.